For Startups, Often the Only Option in a Recession Is to Keep on Hiring

For plenty of entrepreneurs, surviving the recession is accomplishment enough. But those who launched startups shortly before or during the recession can’t be content merely to struggle through. They have to grow, often quickly.

Hiring a team can be a perilous process for these startups because they don’t have a track record to rely on in projecting either the revenue needed to pay new employees or the business demand that the additional hires would help meet.

Those factors are always important considerations for new companies, but the soft economy and dearth of investment capital have trimmed the margin of error even more.

“We’ve rolled the dice,” says Bryan Johnson, CEO of Braintree Payment Solutions, a Bartlett, Illinois-based credit card processing firm launched in 2007. “We hired knowing that we were vulnerable, that if we were to lose customers, [the added expense] would really hurt.”

Braintree hasn’t received any external funding, so even though the company turned profitable in 2008 and has remained so through the recession, each new hire has given Johnson pause. At the same time, business has been growing. Revenue climbed 420 percent last year (Braintree declines to disclose dollar amounts), and the company has had to add employees—in now has a staff of 20—to keep up.

“The hiring pace has been pretty aggressive because we’ve had to keep up with demand,” Johnson says. “So far that’s paid off, and we’ve been able to pay people with the cash flow we have and also to deliver what we need to deliver.”

Even well-capitalized startups are more cautious about hiring during a recession because they are wary of demand. Matt Moog raised $5 million to launch Viewpoints Networks in 2006 but limited staff to a dozen until the company, which builds consumer review Web sites, turned profitable in 2009.

“We were growing incredibly rapidly [in 2009] but still took a conservative approach initially because we wanted to make sure that this new business was really there. We wanted to allow demand to build before we hired people to meet it,” Moog says.

He added 40 employees last year, accelerating that pace when Viewpoints began licensing its service to create proprietary consumer networking sites for companies including Hoffman Estates, Illinois-based Sears Holdings Corp. He has added 20 more people so far this year, bringing total headcount to about 60, and has subcontracted for offshore software development.

“This year we’re taking a more proactive approach, hiring ahead of the curve in anticipation of more demand. We’re still doing that while making sure that we are profitable and growing, but it’s more aggressive.”

The cautious approach is wise, at least for now, according to Miles Kierson, president of Kierson Consulting, a management consulting firm based in Arlington Heights, Illinois. Two of his clients recently considered making significant hires or purchases in anticipation of increased demand, and in both cases the prospective business didn’t materialize.

“People are nervous, and they ought to be,” Kierson says. “Two years ago, you wouldn’t even think that it was risky to grow, at least a little bit. Now it’s risky, because nobody knows what’s going to happen. Every day there’s good news and bad news about the economy, and for the most part it doesn’t really look like there’s much change.”

He advises businesses to bet on new hires only if there’s enough cash on hand to bear the added expense and survive a surprising, immediate downturn in revenue.

“We certainly could have gone a slower route, or raised capital or built a cushion in case something went wrong,” he says. “But we made good decisions that have worked out for us, and everything has gone our way.”